Major software vendors are shaking up the open-source market. Microsoft Corp.'s deal with Novell Inc. and Oracle Corp.'s move to support Red Hat Linux have sent IT investors scurrying to figure out what it all means.

Red Hat investors are scared. Company shares (ticker symbol: RHAT), trading around US$19.50 before the Oracle announcement, are now trading for about 5 percent less. In the last 30 days analysts polled by Thomson Financial have changed their tune on Red Hat. The company rated four "strong buys" from analysts before the Oracle announcement, now it only has two. No one was advising a sale of Red Hat stock. Now two analysts counsel a "sell."

One week after the Oracle move, Microsoft announced its deal with Suse Linux distributor Novell. The deal calls for Microsoft to offer sales and support for Suse, work with Novell on interoperability and indemnify Suse users and developers from potential Microsoft lawsuits against open-source copyright infringement involving Windows. Before the news, eight analysts advised a "hold" on the stock and three analysts counseled a "sell." Now only one analyst is advising a "sell" and 10 are advising a "hold." Novell shares (NOVL) dipped after the announcement. Not exactly a standing ovation.

Some industry insiders say that Microsoft is driving wedges into the open-source community, creating two classes of Linux users, one protected legally by the biggest software company in the world, while other users remain unprotected. Added to this is the fear that major IT vendors' adoption of Linux will cause it to splinter into slightly different versions -- like the various versions of Unix -- and sow confusion.

Underneath the current angst, though, there are signs of a bedrock belief in Linux and open source. IDC reported that while global Windows server sales were $17.7 billion for 2005, compared to Linux's $5.7 billion, Linux growth was 20.8 percent in the fourth quarter, compared to 4.7 percent revenue growth for Windows. Government muscle is also behind open-source software. Municipalities around Europe, for example, are switching to open source.

Sun Microsystems Inc.'s announcement this week that it would open-source Java under the GPL is a vote for the validity of the license among developers working on next-generation products. Meanwhile, open-source companies with innovative business models are starting to go public. Open-source security vendor Sourcefire Inc. announced it would go public, within 24 hours of the moment Oracle made its announcement to support Red Hat. Open-source application tools developer Trolltech ASA went public on the Oslo Stock Exchange in July.

Red Hat's share price may continue to decline in the short term. Analysts still predict, however, that the company will earn more in its February quarter than in the current quarter. Red Hat will get a chance to show how it plans to move up the software stack next week. Open-source middleware vendor JBoss, acquired by Red Hat earlier this year, will hold a conference in Berlin to discuss its service oriented architecture. Serious IT investors will be keeping their eye on the ball, and scrutinizing the strategy.